M3 - There Is Always A Funny Side To A Sad Story

Monday, November 14, 2005

While the world is still waiting for an explanation why the Fed has decided to discontinue the publication of the broadest monetary aggregate a reader mailed this poster of a new, scary horror movie in the making.

Men In Green

PICTURE: Courtesy of Keith Taylor forThe Wall Street Examiner

Of note is also this email from a member of the banking community who points out that M2 will show exploding money supply growth with a time-lag only. Get ready for $52 Grande Mochas at your Starbucks by the time you retire.
I was on vacation, and did not get the notice until last night. I was shocked by the discontinuance of these numbers.
"Looking back into history economic data was only kept a secret in failing economies, e.g. the Soviet Union."
This was exactly my first impression. "What they cannot see will not hurt them", or "worry them." Overall, it is a very serious change in events. Next year, I will be living in a country that does not make public its money supply at the level that counts the most, electronic creation. And other key number reports are being removed as well.
The money supply has doubled in 9 years. If the rate increases even more, ( and I suspect it will), then 8, 7 or 6 years is not out of the question. The sad truth is that we will not be able to tell after 2006. We simply will not know what the rate of growth is, until it finally shows up in M2. If M2 takes off, then we can only guess at how bad M3 must be.
I consider this a final straw in my mind regarding the integrity of the Fed. It no longer has any integrity, so don't expect any.
2005 $10 Trillion
2012ish $20 Trillion
2020ish $40 Trillion
2029ish $80 Trillion
2038ish, $160 Trillion.
This is a very scary to me, because just this conservative estimation delivers back an inflation factor of 16, by the time I reach retirement. If my Cafe Mocha at Starbucks keeps up with inflation, (which I think it would), then a Grande Mocha will cost me $52 when I retire!
If I want to afford my daily Mocha, I need to put away $3.30 a day, get approximately 8.3% yearly compounding interest each year, after taxes!
If I live just 15 years of good health, I need approximately $202,800 for just a flippin coffee per day!
I am not even adjusting for inflation once I hit retirement, so it is more.
Everything so far tells me, that if I relay upon my 401K, and company pension, and Social Security and Medical, and government entitlement programs, I will not be able to afford a Daily Mocha, because I will be trying to save so that I can sustain myself on CAT FOOD. And it will probably be dry cat food, not wet.
That is not something to look forward to in my mind.
As I take from other blogs the Fed published the dreaded announcement after the market's close when everybody in the bond market was gone for a long weekend. Veteran's day is a holiday in the bond market but, oddly enough, not in the stock market.
UPDATE: Chairman designate Ben Bernanke has outlined a strategy to keep interest rates at low levels. But in order to apply this he can't need a public M3 figure. In his infamous "electronic printing press" and "helicopter-drop" speech from November 2002 he said, "the Fed could enforce these interest-rate ceilings by committing to make unlimited purchases of securities up to two years from maturity at prices consistent with the targeted yields. If this program were successful, not only would yields on medium-term Treasury securities fall, but (because of links operating through expectations of future interest rates) yields on longer-term public and private debt (such as mortgages) would likely fall as well." Exactly these purchases would show up in M3 only.
Barry Ritholtz asked whether there is a significant difference between M2 and M3 to which I had the following comment:
M2 has a time-lag and does not contain electronic money. The chairman designate is famous for his speech from 2002 where he told the world about the weapon of the (electronic) printing press which guarantees a never-ending supply of dollars at virtually no cost. As the dollar's value is also determined by how many of them are around I would appreciate it very much if this figure will always be around for reference. I also want to point out that Greenspan said last April "we can guarantee cash but we cannot guarantee its purchasing power." Many more dollars for only little more economy = INFLATION = destruction of savings.
But that is actually very good for debtors. Now help me, who is the biggest debtor in the world and has no plan whatsoever to apply fiscal prudence and who was/is his chief economic advisor...
Sorry, but I can't prevent panicking if this decision towards more secrecy at the wrongest of all places does not get reversed and not even a gin and tonic will relieve me from this fear. An inflation target won't help if we can't determine the spread between money supply and GDP growth. I won't fly by night without instruments. Is this the BIG pivot point for the dollar?
And we haven't even started the discussion about the lack of repo data from next March on. The fed holds ever bigger amounts of repo agreements, buys ever bigger parts of government debt and now wants to do it all in the darkroom. Is this sound monetary policy?
The Euro may not look good either but the ECB applies a degree of transparency that can be a model for the Fed.
Also don't take Greenspan's remarks about the lessons that can be learned from the demise of the pound sterling too easy. He would not point at such events if they were completely unimaginable.
And coming to an end; don't you think it is better to know about the multi-trillion difference between M2 and M3 than to wake up to a big suprise one day? Every democratic government/economy needs to run a complete balance sheet if it won't get the reputation to be an instrument for self-service of the privileged.
Barry also noted that M3 can be painstakingly constructed from other - still available - data. Well, I don't know about the size of his resarch staff but I can safely assume that everybody not working amongst a herd of subordinate researchers will be excluded from M3 interpretation in this case. I co-sign his last para that states
"Given the computing power at the Fed's disposal, and the already incurred expense of compiling the data components, it essentially costs the Fed nothing to create the M3 data. Compared to CPI, this is one of the most steady data points the Federal Government generates. It seems a shame to lose a series that has been reported (and in such a consistent manner) for so many decades."
William Polley has promised to come up with a post on M3 after grading a set of exams.


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